spacs are the construct vcs need to fund clean tech

Considering the challenges posed by a changing climate and the increasing need for energy worldwide, greater attention is now focused on developing new, environmentally friendly technologies – encompassing solutions like renewable energy sources, energy storage systems, and nuclear power. While these technologies hold significant promise, substantial innovation is necessary for their advancement, and innovation is heavily reliant on substantial financial investment.

A key challenge exists: securing initial funding for clean technology ventures has proven difficult, which is hindering the expansion of new energy businesses. What accounts for this situation? Generally, companies in the clean tech space do not possess the same level of responsiveness and adaptability often seen in early-stage startups.

A rapid pace of development is effective for products like mobile applications for consumers and software-as-a-service platforms. However, the clean tech industry typically deals with heavily regulated, large-scale projects that demand significant capital investment and are essential for reliable operation.

This situation has negatively impacted both financial gains and positive environmental outcomes. Data from Cambridge Associates indicates that venture capital-funded clean tech companies have experienced an average internal rate of return (IRR) of -15% since the year 2000. This contrasts sharply with venture-backed healthcare companies, which achieved a 24% IRR over the same period.

Why clean tech lacks funding

Despite its worthwhile goals of improving the world through technology – creating a cleaner, safer, and healthier environment – investment in clean tech has been hampered by its incompatibility with conventional venture capital practices. A core element of the venture capital approach involves minimizing the risks associated with novel concepts and providing substantial funding to the most viable ones, ultimately facilitating returns through mergers & acquisitions or initial public offerings (IPOs).

This framework enables venture capital firms to recoup their investments, along with gains that empower them to secure funding for subsequent ventures. These financial milestones also provide companies supported by venture capital with the resources to expand rapidly and broaden their influence in the marketplace.

The differences between the healthcare and clean tech sectors illustrate this point. Venture capitalists effectively mitigate risks in the healthcare industry, and numerous innovations achieve acquisition or IPO status annually. Consequently, since 2012, the average yearly ratio of capital returned through exits to venture capital investments has been 1.8. In contrast, clean tech’s ratio stands at just 0.2, representing a more than 800 percent disparity. This outcome has led to diminished returns and restricted funding opportunities for clean tech businesses.

Enter (or reenter) the SPAC

Considering the current global environmental challenges and the limited energy resources in developing nations, a collaborative solution is essential. Special purpose acquisition companies (SPACs) are notably enhancing the venture capital landscape for clean technology. As defined by Investopedia:

During 2020, over 110 SPACs finalized deals within the U.S., providing these businesses with over $29 billion in funding.

In 2020, SPACs allocated nearly $4 billion in capital to clean tech companies, including Fisker, Lordstown Motors, QuantumScape, Hyliion, XL Fleet, and others. This development increased the ratio of funds obtained at the time of exit to venture capital initially invested in 2020 from a prior average of 0.2 to a more substantial 0.6, representing a 200% increase.

We anticipate even greater progress in 2021. This expectation stems from the fact that 43 SPACs are currently actively seeking or completing merger agreements with companies specializing in clean tech, which could potentially deliver $12 billion in additional growth capital. Even assuming no further new SPACs emerge in 2021 and a historically low rate of mergers and acquisitions and initial public offerings, 2021 still appears promising for continued growth in clean tech investment.

Protecting the Reputation of Clean Tech Companies

Nikola Corporation stands out as a prominent example within the realm of clean technology special purpose acquisition companies (SPACs). The manufacturer of battery-electric and hydrogen-powered trucks gained significant attention after becoming a publicly traded company last June through a merger with VectoIQ, a special purpose acquisition company. Initially, the company’s market value experienced substantial growth, but later faced scrutiny due to allegations of inaccurate claims regarding its technology and other aspects of its operations.

While instances like Nikola could potentially damage the growing acceptance of SPACs as a method for encouraging investment in clean technology, they shouldn’t define the trend. Numerous emerging businesses demonstrate strong quality and ethical standards. Stem*, a prominent company specializing in energy storage optimization, is currently preparing to go public through a merger with the Star Peak SPAC, subject to SEC approval.

The public market has responded favorably to this SPAC. If the merger is completed, Stem will have access to over $450 million in capital to support its expansion and increase its impact. This exemplifies the positive role SPACs can play as a venture capital mechanism essential for the success and growth of the clean tech industry.

From my perspective as a long-standing venture capitalist in the clean tech sector, it’s noteworthy that public investment through SPACs may provide a solution to challenges within the traditional clean tech venture capital model. I had previously anticipated that corporations would increase their mergers and acquisitions at higher valuations to address these issues, but a significant period has passed without that happening.

Corporations appear satisfied with continuing their important role as investors and supporters of clean tech companies, rather than acquiring ownership. Nevertheless, providing capital to promising clean tech companies will undoubtedly lead to increased impact, as these businesses utilize those funds to expand their operations.

The need for innovative and varied methods for identifying and funding exceptional clean tech companies is critical. SPACs are poised to become the necessary instrument to elevate clean tech to a level comparable with sectors like healthcare, a development that will ultimately prove advantageous for everyone.

*Stem is a Wind Ventures portfolio company.